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Despite the department of industrial policy and promotion (DIPP) pitching for curbs on FDI in existing pharmaceutical units, the government on Wednesday announced continuation of the policy of allowing 100% FDI in the brownfield space, subject to approval from the Foreign Investment Promotion Board (FIPB).

A press note issued by the DIPP following an earlier Cabinet decision, however, said the non-compete clause would not apply for mergers and acquisitions involving FDI in the pharmaceutical space, except in cases where the FIPB feels it is needed.

Analysts said the discretion given to the FIPB to vet the proposals and decide whether to invoke the non-compete clause could reduce potential FDI flows into the sector, which has seen a flurry of acquisitions of Indian units by foreign drug-makers in recent years.

FDI up to 100% is allowed in new (greenfield) ventures through the automatic route.

The DIPP had contended that FDI limit in companies making critical segments like oncology and vaccines be brought down to 49% through the approval route. It also wanted to enforce compulsory capacity creation by the foreign investor. Other riders recommended by DIPP included not allowing foreign investors to divest their manufacturing and R&D facilities in case of ownership transfer, and forcing them to put at least 25% of their total investment in research. The DIPP had also argued that acquisition of Indian pharma companies would lead to a paucity of essential medicines and a price spiral. This was refuted by analysts citing sufficient competition in the segment and alternative therapies available at low cost.

With the PMO, the finance ministry and Planning Commission voting against such a policy overhaul at a time when the country was liberalising foreign investment in various sectors and needed copious capital inflows, the DIPPs views fell flat. The DIPP, however, could get the non-compete clause removed, contending that if a promoter sells one facility, he should not be barred from using all his knowledge and expertise to start a similar venture.

While the pharma industry is relieved by the governments stand to continue with the policy, it is worried about the conditional scrapping of the non-compete clause.

The domestic industry fears that removing this clause would reduce its negotiating powers to get a high valuation, while foreign players are concerned that they (as buyers) would not be able to limit competition. Under a non-compete clause, existing promoters who sell out cannot re-enter the same line of business for a substantial number of years or never in certain cases limiting competition for the buyer.

The industry needs non-discretionary and clear rules for investment. They (government) have granted discretionary powers to the FIPB which, for a fee, could be overridden, said DG Shah, general secretary, Indian Pharmaceutical Alliance.

However, Ranjana Smetacek, director general of the Organisation of Pharma Producers of India, which represent foreign drug makers said a case-by-case review of the non-compete clause would encourage future deals.

Shah added that the move could also remove the leverage that Indian companies had to negotiate premium valuations. Abbotts agreement to buy Piramal Healthcares domestic formulations business for $3.7 billion in 2010 prevents promoter Ajay Piramal from entering a similar business for eight years. Abbott had valued the Piramal unit at nine times annual sales.

Analysts say similar high-value deals in the pharma sector may take a beating due to the conditional use of non-compete clause. In 2008, Japans drug major Daiichi-Sankyo paid $4.9 billion for a majority stake in Ranbaxy, valuing the company at over five times its annual sales of 2007. Last year, Nasdaq-listed Mylan Inc valued Agila Specialties at $1.6 billion or about 6.2 times annual sales.